How Goldman Sachs sees 2012

Influential US investment bank says the year ahead will be a journey from ‘despair to hope’

Goldman Sachs expects the oil price to rise next year, but not to the $150-per-barrel level it forecast before the collapse of Lehman Brothers in 2008. Photograph: Bernadett Szabo/REUTERS

Wall Street investment bank Goldman Sachs, which is also one of the world’s biggest commodity trading firms, has issued its predictions for 2012 as markets brace themselves for a new year slump.

Goldman’s clients – which range from vast businesses to governments and wealthy individuals – are being advised to prepare for a rollercoaster ride in the first half of the year, but that a gradual recovery should take hold from the summer.

Investors tend to hang on the bank’s words because its views are regarded as among the most influential in global financial markets. Goldman is predicting the FTSE 100 will plunge in the first three months of 2012, before recovering 1100 points (23%) by the end of the year to hit 5800. The bank’s 2012 Europe forecast, entitled Despair into Hope, hedges its bets about what lies in store during the new year, but the central message is one of cautious optimism.

Goldman expects the Footsie to hit a low of 4700 before staging a gradual recovery in the second half of the year – but all bets are off if the euro falls apart.The bank says: “Our economic forecasts assume some resolution to the eurozone debt crisis in the next few months. But the chances of a more chaotic outcome, in particular a break-up of the euro, although still small, have grown.”

Goldman’s economists expect eurozone GDP to contract by 0.8% in 2012, with a short-lived recession in Germany and France, and a longer and much deeper one in the peripheral eurozone countries. “But if a political breakthrough is not achieved before the refunding cycle picks up in earnest in mid-January, the probability of [the European economy] spiralling out of control towards a break-up would substantially increase,” it said.

The bank is predicting a rally in equities in 2012, with the trigger likely to be a better resolution of eurozone problems – one that could involve “an agreement between Germany and France on how to [manage] the debt burden”.

The main European indices, including the Footsie, should rise 10% from current levels, implying a sharp rebound as the markets make the transition “from despair to hope”.

But the timing of this rebound, however, is very difficult to predict because it is likely to be partly dependent on policy developments and political decisions which could accelerate or delay a recovery. “Overall, though, a volatile market, with little overall change, what we describe as ‘fat and flat,’ would be our central view for the year as a whole, but with things getting worse before they get better,” Goldman said. So what else is in store for 2012?

Oil: In May 2008 Goldman forecast that the oil price would climb to $200 a barrel. It got to $150, but the price fell back sharply after Lehman Brothers folded in 2008. After starting 2011 at $95 a barrel, Goldman now forecasts an average Brent crude oil price of $120 (up 15% on the current price) – rising to $130 in 2013.

Shares: Miner BHP Billiton and Rolls-Royce are among firms on the bank’s “conviction buy” list. Goldman is also backing the following sectors for growth: oil and gas, healthcare, telecoms, personal care and household goods. It is less keen on financials, construction and materials, financial services, industrials, retail, travel and leisure.

UK inflation: Inflationary pressures should ease this year as lower commodity prices take the heat off the consumer. Expect a decline from 4.5% in 2011 to 2.7% in 2012 and 1.9% in 2013.

Unemployment: Youth unemployment is at a record 22%. The overall UK unemployment rate is forecast to rise to 8.5% from 8% in 2011.

UK GDP: Economic growth in Britain in the third quarter of the year – an anaemic 0.5% – was driven entirely by manufacturers rebuilding their stocks of goods and government spending, underlining fears of a looming recession. Goldman says GDP growth will fall from 0.9% in 2011 to 0.7% in 2012.

Gold: The gold price should continue to climb in 2012, given the current low level of US real interest rates, with the price forecast to hit $1,940 from today’s $1,607. Gold began 2011 at $1,412.

Copper: Copper, which is used in industries ranging from energy to construction, slumped in value this year, as companies shrank their order books. Goldman says copper for delivery in three months, currently trading at $7,810 a tonne, should rally to $9,500 in the latter half of 2012. It started the year at around $10,000.

Coffee: Prices have fallen in recent months in response to the European debt crisis. As a result, Goldman’s six- and 12-month forecasts are for 200 cents per pound and 175 cents per pound respectively. In 2011, coffee traded at over 260 cents per pound.

US stocks: The bank named 10 consumer companies with considerable potential, including Coca-Cola, Nike, General Mills, McDonald’s, Dick’s Sporting Goods and Comcast.

Technology: Here the recommendations include Apple, Oracle and EMC, as well as some smaller unknowns such as Synchronoss Technologies. Goldman recommends a 20% portfolio weighting to technology, by far the largest of any sector.

Avoid: European banks, which collectively plan to reduce their balance sheets by around €1tn and have approximately €750bn of debt to refinance in 2012. US-based banks could benefit by seizing market share with Citigroup, JP Morgan and State Street among the best positioned.